The National Company Law Tribunal, NCLT bench in the case M/s SVS Marketing Sanitaryware Private Limited vs M/s Kajaria Bathware Private Limited observed wherein the bench comprising of Judicial Member, Shri Ashok Kumar Bhardwaj and the Technical Member, Shri L.N. Gupta observed and has dismissed the application. The bench in the case observed and has held that amalgamation of ‘a Sole Proprietorship Firm’ with ‘a Company’ is not permissible under the law.
Facts of the Case:
The Respondent or Corporate Debtor, M/s. Kajaria Bathware Private Limited is a company incorporated under Companies Act, 1956 on May 22, 2023.
In the present case, the distribution agreement was executed between SVS Marketing i.e., the Proprietorship Firm, who being the Proprietorship Firm through Mr. Shibu M and the Corporate Debtor.
Therefore, Mr. Shibu by terms of agreement prohibited from transferring or assigning part of the agreement to others. Mr. Shibu M was also a shareholder or member in another company i.e., M/s SVS Marketing Sanitaryware Pvt. Ltd. i.e., Applicant or Operational Creditor.
An Amalgamation Agreement was entered between Proprietorship Firm and the Applicant. Thus, the Proprietorship Firm assigned its actionable claims to a Private Limited Company i.e., the Applicant. Therefore, the Applicant was allowed to pursue debt on the behalf of the Proprietorship Firm.
The Respondent defaulted in payment for an amount of Rs.7.33 Crores to the Proprietorship Firm.
The Appellant in the case sent a demand notice under Section 8 of the Insolvency and Bankruptcy Code, 2016, IBS to the respondent on December 13, 2022. An application was filed under Section 9 IBC for initiation of Corporate Insolvency Resolution Process, CIRP.
Issue Raised:
The issue raised before the court was whether the amalgamation between a Sole Proprietorship Firm i.e., M/s SVS Marketing and a Company i.e., M/s SVS Marketing Sanitaryware Pvt. Ltd is valid in the eyes of the law?
Contentions Made By Applicant
The Applicant argued before the court that Agreement never prohibited transfer of business or the assigning of actionable claims. Thus, it only prohibited the transfer of ‘obligation’.
Further, it has been argued by the Applicant that the claims of the proprietorship was transferred to the Applicant as the promoter of both were same and only the actionable claims was transferred.
The Applicant also referred to M/s Consolidated Construction Consortium Limited Vs. M/s Hitro Energy Solutions Private Limited, wherein the Supreme Court while defining the term ‘operational debt’ has held that claim would include good or services both supplied to and received from the Corporate Debtor.
Contentions Raised by Respondent
The Respondent opposed the submissions of the Applicant and stated that the transfer between the Proprietorship and the Company is illegal and the same is not allowed by law.
It has also been pointed out by the respondent that the Distributorship Agreement itself prohibited Mr Shibu M from transferring or assigning services without prior written consent under Clause 8(iii) of the Agreement.
Further, it has been argued by the Respondent that they had no obligation to purchase the unsold inventory.
The relationship between the Applicant and Respondent was solely that of the seller and a purchaser on a principal-to-principal basis. Therefore, the claims of the Applicant at best are claims for specific performance.
NCLT Verdict
The National Company Law Tribunal, NCLT referred to Section 2(20) of the Companies Act 2013, Companies Act observing that the company means a company incorporated under this Act or any previous company law. It has also been pointed out by the bench that for the purpose of Amalgamation under Section 230-232 of Companies Act, the entities must necessarily be “Companies” as defined under Section 2(20) of the Companies Act.
The court stated that as regards ‘Merger or Amalgamation’ as stated under Section 232 of the Companies Act 2013, the parties that are eligible to seek Merger or Amalgamation can file an application before NCLT, but this does not mean that the Amalgamation can take place between ‘a Proprietorship Firm’ and ‘a Company’ as the Section 232 (a) of the Companies Act 2013 specifically deals with the Merger and Amalgamation of two or more companies only.
The court while considering the facts and circumstances of the case stated that neither a ‘Sole Proprietorship Firm’ nor its individual Proprietorship’ is a ‘Company’ in terms of Section 2(20) of the Companies Act.
Therefore, the Merger and Amalgamation of a ‘Sole Proprietorship Firm’ and ‘Company’ is not possible as stated under Section 232 of the Companies Act.
Accordingly, the NCLT dismissed the application. The counsel, Adv. Jojo Jose & Adv. Sunitha John, Adv. Anitta & Adona LLP appeared for the Applicant. The counsel, Adv. D. Bhattacharya, Adv. Deeti Ojha represented the respondent.